Overnight the Russian Central Bank increased interest rates from 10.5% to 17%. This follows sharp declines in the rouble on the foreign exchange markets over the course of this year beginning of course with Russia’s annexation of Crimea in February. During the year the Central Bank has appeared to be happy to let the rouble fall gently but consistently but intervened to spend its foreign exchange reserves whenever the speed of the decline accelerated.
Last night they decided to take some dramatic action to try to stem the decline, hence the sharp rise in interest rates.
It does not seem to have worked as the dollar exchange rate has fallen from 67 to 80 this morning – another 20% decline.
This is reminiscent of sterling’s ejection from the Exchange Rate Mechanism in the early Nineties, when the Bank of England raised rates from 10% to 15% in a single day in an effort to protect the exchange rate. Such a move would have caused so much damage to the economy that it was just not credible or sustainable.
Note that Russia’s oil export revenue is roughly unchanged this year with a halving of the oil price being almost equally offset by a halving of the dollar-rouble exchange rate, so this is some welcome news to the Russian oil industry. However the exchange rate decline is already leading to inflation through import price increases.
The Russian authorities are probably best advised to let the currency markets do their worst since they have already deployed their tools of intervention and interest rates. Eventually the rouble will find a new level.